Quantitative Easing into Credit Easing

The Governor of the Bank of England was yesterday apocalyptic in his description of the present risk of a massive world financial crisis, when he announced another wave of money-creation that is euphemistically called Quantitative Easing
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If this money simply goes to bolster wholesale banks' balance sheets - as the previous tranches did - this will do nothing for the 'real economy'. Only if the money is handed out as extended and increased funding of 'real' businesses can it help to stimulate demand and supply in the economic system that living people inhabit.

But there is a real problem here. Even if the Bank and the Treasury demand that some of the money is made available to businesses, they will hand it for allocation to the old lags in the retail banks who have been so cautious and cynical in lending to businesses in recent years. It is commonplace to hear from businesspeople that the only firms that can get money are those who don't need it. Business owners who want funding for small, often start-up businesses, have to offer their own homes as security, making the funding effectively a personal loan. In really hard times [such as the Governor expects to get worse] the risk for an entrepreneur of placing their house as well as their income into dependency on their business seems too great for many people to take. It is precisely these people and their ideas that should be funded: they are a large portion of the potential that exists as latent force in the economy that needs to be exploited.

Whoever hands out new money to businesses should be prepared to risk funding failures to an extent that bankers cannot comprehend. The greatest need is for an increase in activity and spending - and of productive potential - as soon as possible. Most businesses grow slowly; but they can be empowered to start spending quickly. There is no sure way of picking medium-term winners. The Bank and the government must accept that a significant proportion of properly-allocated easier credit will never be repaid. New methods are needed for getting it into the right hands. The Open Risk Exchange is one such concept: there should be many others: so where are they?

While I wrote this I paused to listen to an interview on the TODAY programme of the Chancellor. He spoke in obvious oblivion to the real current situation. He still argues that the multiply failed banks are the only agencies that could extend additional credit: oh dear!

Party Conferences: Wasted Time and Money

The major political parties - and most of the minor ones - have now held their annual conferences. They were all covered intensively by the media, yet even within the week of the Conservative Conference apolitical televiewers have forgotten all that was said in them. The party faithful have gone home, with mild sensations of satisfaction at having rubbed shoulders with the second-tier professionals, has-beens and never-quite-made-its; and seen themselves on TV monitors and in newspaper photographs. Any feel-good sensations derived from being inside the tent cannot be supported by new policies or by any scintilla of hope for a relaxation of the depressing economic trend. David Cameron's status has been increased, largely because no other politician has enhanced his or her stature: hence the incumbent looms larger, and his responsibility  for the ultimate failure of his government becomes more conspicuous.
The great majority of delegates [and Tory representatives] are people of modest means who will feel the cost of staying in budget accommodation for a few nights over the next couple of months as they are forced to manage their spending that bit more tightly.
Standing outside any party one cannot see any value in the whole ritual; but the negative evidence of the potential bankruptcy of the British model of democracy becomes more compelling. The unfolding experience of economic failure combines with the democratic deficit to lead  towards disillusion with all the underlying assumptions that have allowed Britain to be a successful democracy for over a century. There is no sign of what will follow the final collapse.

Silly Speaking

So: David Cameron made a last-minute deletion from his Great Speech, toning down his pre-announced  admonition to the British people to pay off their debts. What a cock-up!
Tens of millions of those people are net debtors: their mortgages plus unsecured debts greatly exceed their assets. Many people do not even have one month's income in reserve. Meanwhile the overwhelming majority of the population have declining real incomes;  their wage or benefit increases - if they have any - do not meet the rise in prices and taxes that they must pay. If they are able to pay anything off their debts [and some people are being required to do so] this is a small sum each week, and it causes them to reduce their standard of living commensurately
Until today The Prime Minister's silliest utterance was his repetition of the meaningless 'Big Society' tag, which has never had any meaning for either the media or the public.
Now he has just avoided plunging headlong into a display of profound incomprehension and insensitivity. He and his team clearly have no understanding of everyday life under his own regime. Unlike the greatest Tory Prime Minster, the Marquis of Salisbury, David Cameron does not have daily conversations with the grooms, keepers and tenants whose lives were entwined within the routine of a great estate and who were used to speaking with complete frankness to the great man. Unlike Disraeli, Cameron clearly does not have the common sense that enabled the founder of modern Conservatism to say - and to mean - 'Trust the people'. Harold Macmillan was much criticised in the establishment for the 'vulgarity' of his adopting the phrase 'You've never had it so good': but it resonated with the mass of the population and ensured an election victory. Stanley Baldwin had managed a steelworks before he went into politics and he kept the lessons in mind. Winston Churchill was brutally blunt with aides whose recommendations showed an absence of common sense or a failure to appreciate the public mood.
David Cameron's intended admonition to people who simply can't do it to 'pay off their debts' shows a profundity of ignorance that is comparable with Marie Antoinette's 'Let them eat cake'. It is comprehensible [though it proved to be inexcusable] for an eighteenth-century Habsburg to have lived in ignorance of the condition of the people.  It is inexcusable in a twenty-first century Prime Minister to allow a similarly silly assertion to get into the text of a major speech. It may be comprehensible, given Cameron's origins and the fact that he has spent almost all his adult life in the political bubble; but it will not be forgotten as he and his chosen Chancellor stick to their increasingly isolated programme.

NHS Insiders Defend their Patch

Who could be surprised that hundreds of insiders to the NHS, all on comfortable incomes, should challenge the government's proposed changes in the organisation of the Service? The mass letter to the House of Lords, publicised today [when the government proposals go to the Lords], brings together the scare stories that have been coming out over recent months.
It is a pity that this looks such a self-interested move: because I am one of the many whose reservations about Andrew Lansley's proposals increase the more we know about them.
The NHS is notoriously inefficient, and the triumph of managerialism has been deeply regressive - as well as expensive - in terms of patient care. But I would much prefer to see 'competition' in the removal of tiers of management, with massively more authority passed to clinicians, than 'competition' in the form of bureaucratic empires within the NHS pitted against foreign for-profit companies running the hospitals.
The risk of creating huge gaps in universal provision by the NHS is clearly not properly comprehended by the Secretary of State, despite the many years he has supposedly been grappling with these issues.

Cameron's constitutionality

In quashing the members of his Party Conference who want to challenge Britain's status in the European Union David Cameron is bang in line with his predecessors.

Prime Minsters and their Cabinets have their massive power because they are the active members of Her Majesty's Privy Council. After each election the Queen is advised whom to ask to be Prime Minister: that Privy Councillor then invites members and candidate members of the Council to come to Cabinet meetings, and all the other Councillors stand aside. Some Councillors in 'loyal opposition' parties speak against individual proposals to change, or even to keep, policies that they enacted when in government; but the underlying reality is the commitment of all Privy Councillors to the continuity of Her Majesty's Government.

Cameron is resisting a challenge to that continuity.

This position is reinforced by the fact that the United Kingdom's immersion is Europe has been made by a succession of Conservative Prime Ministers:
Treaty of Rome - Heath;
change from Economic Community to European Union - Thatcher;
 Maastricht - Major.

No Labour Prime Minister has such explicit responsibility [or culpability]. The EU is essentially a Tory gift to the British people, and to turn away from it would be a denial of the past that it would be extremely hard for any Conservative Leader to risk.

As to the democratic wish of the people: when has that really mattered?

A complete change for Greece

The gossip surrounding the general meeting of the IMF [International Monetary Fund] in September 2011 went through several phases of panic before the consensual outcome became clear.
Greece is to be allowed a significant default on debts that have long been evidently unsustainable. Thereafter Greece must remain within the euro area, under the discipline of firm agreements with its partners in that deeply flawed venture.
Greece has already displayed a tendency to militancy at the mere announcement of the more obvious measures of austerity. When it becomes clear that the country will be under strict regulation for decades, there is a serious risk that minorities with different political principles - and none - will take whatever sort of militant action [or withdrawal of conformity with the state] seems open to them. Changing the mix of parties in the parliament cannot change a thing: only the dissolution of the Greek state could enable the population to try to escape their collective obligations: and the cost of ultimate anarchy would certainly be greater for the individual than will the draconian measures imposed by any government that maintains law and order.
This situation is very challenging to the basic concept of democracy; which has implicitly been a requirement for any state's membership of the European Union [and thus of the eurozone]. If the Greeks refuse to support any party that was willing to form a government that conformed with the new requirements of the eurozone, will the EU and the USA support an authoritarian government? The odious rule of the Colonels is well within living memory.
The resolution of the monetary and debt problems that have been facing the Greeks risks the future of Greek democracy: watch this space!

The Importance of the Lottery

Unless a person has an outstanding artistic or sporting talent - which can bring about a meteoric rise to the Premier League, the Top Ten or the Turner/Booker Prize - the chances of anyone gaining significant net wealth [or even a high income] from conscientious work are negligible. Hence tens of millions of people participate in the National Lottery, which has enabled thousands to fulfil or to exceed their dreams and is seen by the unsuccessful millions as the only way out of the trivial round of work or the dire attempt to remain optimistically human in receipt of benefits. The apparently-conspicuous exception to this rule of modern life, which has been selected for vituperation from almost all other segments of the population, is so-called 'banking' where bonuses and incentive payments, rather than conventional salary-and-pension packages, have provided a minority of staff the 'telephone number' annual remuneration to which so much publicity has been given
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Most of the activities for which the huge incentive payments are made are various forms of gambling: using cyberspace betting-slips known as derivatives, options, futures and swaps. The players in these heady games do not bet with their own money. The bets are mostly entered 'on tick' in the names of the employing firms and they can be supported by the funds in the 'real-world' sections of the banks; and in the pension funds, sovereign investment funds and other sources from which the City derives its 'working capital'. Although the punters are awarded their bonuses according to the reported profitability of their punts, they are actually paid in deferred shares in their employer company [which dilutes the value of all pre-existing shareholders' assets] and in cash which is drawn from the profits that are taken in worldly money by the real-world banking business.
No betting tax is levied on these activities in which trillions of dollarsworth of bets are placed [and accepted]: while people of modest means must pay the appropriate duty on their lottery tickets and all their other bets in which they risk their own funds.
The complex of activities whose over-development enabled the financial crash of 2007-8 to take place has been described as 'casino banking', and regulators all over the world have belatedly acknowledged this simple fact. In the United Kingdom the Vickers Committee was established in 2010 to advise the government on what preventative measures would protect real-world, economically-necessary banking from the other, higher-risk activities that proved so ruinous.

 To nobody's surprise the committee has proposed the separation of essential banking from the other activities that financial services complex organisations undertake. This can be achieved by the separation of the two streams of business into separate companies, but most commentators expect a less dramatic solution whereby the different segments of a complex financial services organisation each perform in their own specific trading areas, with each trading unit sufficiently capitalised so that it will not become a drain on the reserves of the other sectors of the company.
This is a necessary first step towards ensuring that no bank would ever again be too complex to be transparent or too big to  be allowed to fail. But such separation is not enough to overcome the inherent risk of contagion from one unit to the others within a company, and thence on to other companies.
And even before the government has announced any programme for the implementation [or partial implementation] of the Vickers recommendations the focus of bankers' and regulators' attention is being diverted by the proposal from the European Union that there should be a tax on all banking transactions - in the widest sense of that term, so that derivatives and futures trade would be levied at the same rate as retail banking transactions, mortgage contracts and initial share sales. If such a tax were imposed throughout the European Union, including the City of London, it is believed that Europe would loose a massive amount of trade to jurisdictions where the tax was not imposed. The attention of the UK government immediately focussed on how to counteract this threat to the volume and profitability of the sector, with a consequential weakening of the focus on separation of 'real' and 'casino' activities.

A transaction tax on financial transactions was first proposed many decades ago by the US Economist Tobin, who suggested that the increasing volume of foreign-exchange transactions could be curbed by a small tax on each transaction. Putting a restraint on currency transactions was popular among governments and regulators because money-trading was increasingly being undertaken as a punt for profit rather than to make currencies available to 'real' businesses to fund their purchases. To impose such a tax on all finance transactions would make access to banking business and mortgages more costly for ordinary people and small businesses: which could push some of them into insolvency in the hard times that followed the credit crunch.
A Tobin tax could be appropriate for 'inessential' foreign-exchange trading: were it possible practicably to differentiate transactions that supported the real economy from 'casino transactions'. It is not possible to do this simply and clearly.

Another, more realistic, possibility is to charge the ordinary rate of betting tax on all categories of casino transactions [derivatives, swaps, futures, etc]. Betting tax has the huge advantage that it is payable when the contract is made, so the state would receive the revenue regardless of the outcome from the deal. It could be provided in the regulations that if the parties to any transaction could demonstrate that it genuinely enabled a real-world non-financial firm to spread properly-identified risk, the contract could then be exempted from betting tax. These cases could be dealt with retrospectively, with the tax repaid after any successful appeal.. This proposal directly tackles the need to differentiate the casino from real-world banking, and to discourage excess. So I will refer to it on future occasions